The frustrating part of setting prices for goods and services is
figuring out what competitors are going to charge. Will your price
be so low that you attract customers but can't make a decent
profit? Will you be the only place in town charging so much for the
item? How can you find out what your competitors are charging so
you can adjust your prices slightly higher or lower?

The traditional method is to read your competitors' sale ads
or send someone over to scope out their prices. Wonder why you
can't save the hassle and just pick up the phone to chat with
your competitors about it? Because that would be a direct violation
of the Sherman Antitrust Act, a federal law adopted in 1890. The
Sherman Act was designed to encourage healthy competition and keep
any one company from monopolizing a whole industry. It's the
law under which the Justice Department is pursuing Microsoft, but
it can apply to even the smallest store. The law forbids competing
companies of any size from entering "contracts, combinations
or conspiracies" in restraint of trade.

That's what got a group of gas station owners in trouble in
Dothan, Alabama. Motorists noticed a pattern: After prices at most
gas stations in this town of 50,000 had remained the same for
weeks, suddenly they would all change. Major brand dealers charged
the same as independents, consistently higher than in surrounding
communities. Of course, it's easy for gas station owners to
keep tabs on what the competition is charging, since current prices
are typically posted on large signs out front. Still, in this town,
the sudden changes looked suspicious.

Four consumers filed a class-action lawsuit under the Sherman
Act against a dozen gasoline retailers and their owners. During the
trial, employees testified that they had overheard conversations
and phone calls in which one owner asked another to "go
along" because "everyone" in Dothan was about to
increase prices. Those who refused sometimes received angry visits
from competitors. The jury concluded that five of the station
owners had engaged in illegal price fixing.

Violation of the Sherman Act is a felony, subject to fines of up
to $1 million and jail terms of up to three years. Injured
competitors or customers may sue and recover up to three times the
dollar amount of their damages. Just defending such a lawsuit can
easily cost $50,000 in attorneys' fees, and bad publicity from
a price-fixing case can last a lifetime. But the defendants in
Dothan lucked out; the court only assessed a nominal fine and
issued an injunction not to do it again.

Steven C. Bahls, dean of Capital University Law School in
Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane
Easter Bahls specializes in business and legal topics.

What's Safe?

Does this mean you can't engage in "parallel
pricing," adjusting prices to reflect those of your
competitors? No. Courts recognize that when there's a limited
number of companies competing in an industry, prices will tend to
be the same. If the industry leader lowers prices, competitors will
do the same if they want to survive. If the leader raises prices
but the others don't follow suit, the leader's prices will
soon drop. No firm will stay out of line for long. Courts have
ruled that it's not illegal for businesses to keep their prices
parallel as long as they don't consult with each other about
it. There's no sense in outlawing a practice that's
inevitable.

The problem is determining whether parallel prices stem from
independent decisions or from owners cutting a deal. Merely
asserting that your price decisions were independent probably
won't persuade the jury if the evidence points the other way.
In one Utah case, 14 distributors of eggs were accused of price
fixing when they all offered egg farmers the same depressed price
for their eggs. The distributors denied they'd agreed on
prices, but the jury didn't believe them because company
representatives met regularly at a cafe and constantly made phone
calls to each other.

The Sherman Act also outlaws agreements between competitors on
other matters besides pricing. For instance, you can't sit down
with your competitors and agree to standardize your products,
refuse certain credit cards or charge a standard interest rate on
financing packages. You can't divide territories with your
competitors or agree on who gets which customers. If an agreement
tends to limit competition, it's illegal.

Know Your Rights

One exception concerns manufacturers who sell through
dealerships. While competing companies may not conspire together to
set prices or standardize products and services, it's not
illegal for a manufacturer to set a suggested retail price and
offer incentives for following it. The U.S. Supreme Court
established this principle in 1919 in a case called United
States v. Colgate & Co., ruling that the Sherman Act
"did not restrict the long-recognized right of trader or
manufacturer engaged in an entirely private business, freely to
exercise his own independent discretion as to parties with whom he
will deal; and of course, he may announce in advance the
circumstances under which he will refuse to sell." Later case
law would decide what manufacturers may and may not do in this
area. In general, though, if a dealer refuses to follow a suggested
retail price, the manufacturer is free to terminate the
dealership.

For example, in one case decided last November, a manufacturer
of products for horses told its dealers that it would stop working
with any dealer who sells its products for less than 90 percent of
the established retail price. When a dis-tributor issued a catalog
listing the company's horse blankets and sheets for less, the
manufacturer promptly sent a letter terminating the dealership. The
distributor filed a complaint accusing the manufacturer of
price-fixing. But the U.S. District Court for the Middle District
of Alabama, southern division, ruled in favor of the manufacturer
because it stated in its letter to dealers that it had established
the pricing policy unilaterally, and was not seeking either the
approval or agreement of the dealers. When customers called with
complaints, company employees would listen but explain that they
could not debate the policy. The company would help dealers work
out the math if requested, but wouldn't discuss it. And when
the terminated dealer tried to talk with someone at the company to
"work something out," they refused. The manufacturer knew
its legal obligations and was very careful not to get on the wrong
side of the Sherman Act.

What's the lesson? Don't talk about prices or policies
with your competitors. If you sell through dealers, you may
establish a pricing policy and terminate those who fail to comply,
but don't discuss it or debate it with your dealers. Otherwise,
you risk legal trouble for conspiring to restrain trade.